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Air Conditioner & Heating Stocks Strong Despite Coronavirus

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The Zacks Building Products - Air Conditioner & Heating industry comprises designers, manufacturers and marketers of a broad range of products for the heating, ventilation, air conditioning and refrigeration markets. The products include rooftop units, chillers, air-handling units, condensing units and coils. The industry players also supply thermostats, insulation materials, refrigerants, grills, registers, sheet metal, tools, concrete pads, tape and adhesives.

Air conditioning and heating equipment are sold in residential replacement, commercial and industrial HVAC (heating, ventilation and air conditioning), and residential new construction markets.

Let’s take a look at the industry’s three major themes:

  • The industry participants are likely to experience higher demand, courtesy of a solid housing market scenario backed by a declining interest/mortgage rates environment. Apart from this, spurred-up demand on a rise in disposable and per capita income as well as the drop in unemployment rate cannot be ignored. Higher construction spending activity in residential, non-residential, commercial and industrial sectors is a boon for the Air Conditioner & Heating industry.
     
  • Along with accelerated construction spending in the United States, continued investments in technologies designed to revolutionize customer experience seem to be vital for the industry. Digitization of the companies’ marketplace via e-commerce and iOS/Android-enabled apps, supported by a comprehensive database of product information, continues to see momentum. Importantly, new investments in the expansion of distribution footprint, research and development projects as well as marketing programs are contributing significantly to the companies’ top lines. The companies are also actively pursuing accretive acquisitions to broaden their product portfolio, and expand geographic footprint and market share. Meanwhile, services associated with maintaining, monitoring and repairing existing equipment are also providing the industry participants a stable source of revenues. Notably, the industry generates a major share of revenues from these services, which consumers generally cannot suspend even when the construction markets fluctuate.
     
  • However, rising raw material costs due to tariffs and trade restrictions have been hurting profit margins to some extent. Also, stiff competition and the impact of seasonality on the industry’s revenues are significant risks. The industry is also susceptible to stringent governmental regulation on energy efficiency and gas emission. HVAC systems use refrigerant for cooling that is harmful to humans and the environment. Most importantly, as the recent coronavirus outbreak in China has taken the shape of a global crisis, the supply chain disruption is expected to stall the U.S. economy and thereby mar the industry’s prospects for now.

Zacks Industry Rank Indicates Bullish Prospects

The Zacks Building Products - Air Conditioner & Heating industry is a five-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #22, which places it at the top 9% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since February 2020, the industry’s earnings estimate for 2020 and 2021 has gone up 16.2% and 15.5%, respectively.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms S&P 500 and Sector

The Zacks Air Conditioner & Heating industry has outperformed the broader Zacks Construction sector as well as the Zacks S&P 500 composite over the past year.

The industry has lost 6.2% over this period compared with the S&P 500’s decline of 16.6%. The broader sector has also lost 23.3% in the said time frame.

One-Year Price Performance


 
 
Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing Air Conditioner and Heating stocks, the industry is currently trading at 18.6X versus the S&P 500’s 13.9X and the sector’s 9.9X.

Over the past five years, the industry has traded as high as 27.6X, as low as 18.6X and at the median of 23.8X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

 


 Bottom Line

Rising costs, heavy governmental regulation and competitive pressure are concerning. Furthermore, the coronavirus-led impact on the industry is noticeable. Nonetheless, a major boost in residential market along with infrastructural and construction spending should continue to drive the industry’s performance. Additionally, maintaining, monitoring and repairing services along with prudent cost-management practices leveraging technology should lend support.

Below we present only one stock from the Zacks Air Conditioner & Heating space that carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AAON, Inc. (AAON - Free Report) : Headquartered in Tulsa, OK, this company is a manufacturer of air-conditioning and heating equipment and its 2020 earnings estimates have moved 31.2% up in the past 30 days. It has an expected earnings growth rate of 43.1% for 2020.

Price and Consensus: AAON




Investors can also keep an eye on the following Zacks Rank #3 (Hold) stocks with impressive prospects.

Comfort Systems USA, Inc. (FIX - Free Report) : The Houston, TX-based leading provider of mechanical services — including heating, ventilation, air conditioning, plumbing, piping and controls — has an expected earnings growth of 10.7% for 2020 and 11.5% for 2021.

Price and Consensus: FIX


Lennox International Inc. (LII - Free Report) : Headquartered in Richardson, TX, this company is a provider of climate control solutions on an international scale and it has a three-five year expected EPS growth rate of 20%.

Price and Consensus: LII


Watsco, Inc. (WSO - Free Report) : Headquartered in Miami, FL, Watsco distributes air conditioning, heating, and refrigeration equipment; and related parts in the United States, Canada, Mexico and Puerto Rico. It has an expected earnings growth of 4.5% for 2020.

Price and Consensus: WSO


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